Exploring the Economic Valuation and Social Value of Spectrum

Transcription

1 Session 4 Exploring the Economic Valuation and Social Value of Spectrum John Alden Freedom Technologies, Inc. Regional Seminar On Costs & Tariffs Phuket, Thailand 8-9 March,

2 Introduction Liberalization has fundamentally changed the way we view and manage spectrum New paradigms of spectrum management Property rights model Spectrum commons approaches Command and control approach For operator-driven services, such as IMT, the property rights model has become predominant This has led to a growing economic predominance in views of spectrum i.e., its growing commoditization 2

3 Spectrum: Exploding Demand By the end of 2010, there were 5.3 billion mobile wireless subscriptions globally, including 940 million subscriptions to 3G services. Mobile communications and Internet are converged onto the same platforms With the race to be part of Info Society, spectrum for mobile data is being increasingly seen as a building-block to national economic prosperity. Meanwhile, there is now a well-established track record for competitive bidding for commercial spectrum To promote most efficient use To raise revenues for government 3

4 Valuing Spectrum Market Valuation is used for several purposes: Regulatory fees (initial and recurring) Competitive bidding (auctions and tenders) Several approaches can be taken: Income approach Determining the value of services that can be marketed using spectrum as an input Market comparable approach Deriving value through comparison with the same or similar spectrum rights marketed elsewhere (i.e. benchmarking) Direct v. Indirect Valuations Direct An amount paid or offered for a spectrum block at auction or in spectrum trading Indirect (proxy) Determining what a spectrum block might be worth without ever actually putting it on the market (e.g., AIP) 4

5 Opportunity Cost Definition: The value of the next-best choice in a series of choices, or the value of something one forgoes in order to choose something else. E.g. In choosing a Corvette over a Mustang, the value of the Mustang represents the opportunity cost. This provides a rough threshold valuation had the value of the first choice been less than the opportunity cost, one might ve picked the second choice. Opportunity cost in spectrum The value that justifies investing in that spectrum opportunity rather than another investment opportunity Problem: Moving beyond arcane economic theory 5

6 Valuation: An Inexact Science The reality: spectrum valuation is not static, but varies: Over time In different geographic areas Depending on the amount of spectrum already on the market Depending on the political, regulatory and business environments Depending on the rules for the auction or competitive bidding Depending on the technology that will employ the spectrum Basic decisions can affect valuation: How many licenses will be offered How many bidders will be pre-qualified Will licenses be encumbered with technical rules or technology neutral 6

7 Non-Commodity Viewpoints Unlicensed uses WiFi an unlicensed success story Determining the value of unlicensed spectrum Public safety, public service and government uses they have economic value, too Public safety a third rail for spectrum pricing How do taxpayers bid for spectrum The tightening space for government spectrum uses 7

8 Auctions: A Basic Taxonomy Closed, single-round tenders Open, multiple-round bidding Open, ascending-bid auctions Simultaneous, multiple-round ascending-bid auctions Hybrid and innovative approaches English/Dutch hybrid Incentive auctions EBay or dynamic models 8

9 Auctions: Some Things To Consider Setting Bidding Thresholds Transparency and Accountability Heading off Signaling & Other Anomalies I rrational Exuberance 9

10 Secondary Trading The Pioneers: UK, Australia, New Zealand, US Results: Somewhat thin The theory: Leasing and trading help: Get spectrum into the hands of entities willing and able to use it, Sets ongoing value of spectrum, and Provides a safety net for initial auction failures The practice: An immature market and continuing tendencies for spectrum warehousing Governments are exploring ways to liven up the nascent secondary markets 10

11 Case Study: India G and BWA auctions DOT expected USD 8 billion in revenues; auctions raised nearly USD 23 billion Held two sequential auctions BSNL & MTNL required to pay highest private bid for licenses received pre-auction Other licenses awarded in multiple-round simultaneous bid auctions High bids raised concerns of overbidding and under-capitalization 11

12 Case Study: New Zealand Policies for renewing fixed-term licenses Determination: Incumbents could renew by paying a marketoriented renewal fee, or relinquish spectrum Two approaches used to determine market-oriented fee: TV and radio broadcasting An income approach, based on past and forecasted revenues Cellular Optimal Deprival Valuation approach estimated the cost of modifying the incumbent network to maintain a given level of service following a marginal reduction in spectrum rights. Both TNZ and Vodafone accepted the renewal price offer 12

13 Case Study: Germany Mass Auction of 359 MHz of Spectrum Four bands were put up for sale In the 800 MHz band only three licenses were offered leaving one incumbent out. Auctions netted only EUR 4.4 billion out of an expected EUR 6-8 billion E-Plus was the operator left out in 800 MHz, but the auction raised more than the other bands on sale (1800 MHz, 2 GHz, and 2.6 GHz). 13

14 Spectrum Pricing Checklist - 1 Assess and weight each national goal to be achieved via a spectrum distribution National Goals for spectrum distribution may include: Efficient and productive usage of the spectrum resource Rapid and effective introduction of a new wireless technology Development of wireless service in remote, rural or low-income areas (i.e., universal access) Protection or promotion of social welfare and/or public service Government revenue generation 14

15 Spectrum Pricing Checklist - 2 Determine the value of spectrum Steps/Factors to Consider Assess the market (i.e., how many licenses to distribute, how much demand is there from operators, etc.) Assess non-economic market factors (i.e., geographical, political, regulatory, competition policy etc.) Use administered pricing approaches to set a potential price floor or expected bid level Consider Non-Commodity Approaches Steps/Factors to Consider Consider whether an unlicensed approach provides greater economic returns Consider whether a non-commercial use such as promoting the development of public safety networks, would be desirable 15

16 Spectrum Pricing Checklist - 3 Determine assignment method auction, administered pricing or no-fee distribution Steps/Factors to Consider: Assess distribution approaches to determine which is appropriate For administrative pricing approach, consider criteria to use Consider setting prices based solely on underlying regulatory costs (i.e., regulatory fees) Consider use of incentive pricing to promote efficient use 16

17 Designing An Auction - 1 Setting the stage Draft rules for use of the spectrum (license parameters, technology neutrality) Set license terms and conditions (regulatory fees, term limits, renewal criteria) Set auction rules Consider spectrum distribution goals Consider steps to curb collusive behavior Best Practice: Seek public input and promote transparency of rule setting Spreading the word Draft prospectus materials covering full range of spectrum and market environments Conduct operator outreach activities such as road shows, visits and responses to queries Best Practice: Continue emphasis on transparency, openness and responsiveness 17

18 Designing An Auction - 2 Pre-qualification Establish bidder criteria in a clear and open manner Publish pre-qualification criteria as part of the solicitation of bids. Best Practice: After the solicitation of bids is sent out, pre-qualification criteria should not be altered Cautionary Note: Any failure to adhere scrupulously to published, transparent pre-qualification criteria will undermine the auction s credibility 18

19 Designing An Auction - 3 Auction infrastructure and procedures Employ neutral, professional auction specialists to design and operate the auction Design and installation of auction software and hardware is vital to the integrity and effectiveness of the auction. Develop security and cyber-security of the auction facilities This is of paramount importance Develop contingency and troubleshooting plans Best Practice: Test end-to-end auction procedures, systems, and technologies used prior to the actual auction 19

20 Designing An Auction - 4 Follow-up policies and rules Formulate and publish policies and rules for payments (including any installment payment plans) well in advance Determine and publish penalties and policies for auction payment defaults Set re-auction timing in case of payment or other default Monitor and follow-up on rules requiring network build-out milestones, etc. 20

21 Issues To Discuss Will non-profit/non-commercial users be able to keep pace in a commoditized spectrum market? How can we broaden consideration of spectrum s economic value in the context of unlicensed, public safety and government uses? Are current economic models for spectrum valuation sufficiently robust to avoid undervaluing or overbidding? Do potential bidders have sufficient information on spectrum opportunities to engage in competitive bidding effectively? 21

22 John Alden: